Consumers declare 'no contest' as energy industry regroups

By Rod MyerJuly 6 2002

The complicated national energy market has prevented competition from thriving and "we're all paying for it", say consumer groups.
Picture: VIKI LASCARIS

Australian Gas Light's $880 million purchase of Pulse Energy this week shows a massive realignment of the energy markets is well under way that will leave fewer competitors operating across state boundaries.

The early days of privatisation and deregulation saw mainly government-owned, fully integrated monoliths that had fashioned Australia's energy industries replaced by several private operators. Some hoped that in the retail sector particularly, the ultimate result would be new operators, nimble and competitive, that would give consumers a new deal.

But that prospect has not eventuated. The financial realities of the modern utility business, the excesses of the market created by deregulation and the collision of two ownership systems, one private and one state, have reduced competition and kept the market in the hands of incumbent players. John Dick, vice-president of the Energy Action Group, a consumer watchdog, says the system is "too complicated and we're all paying for it".

At the consumer level, a diverse, competitive market is not emerging. Six months after full contestability was introduced, only 16,000 Victorian non-industrial customers (0.8per cent of the market) have changed retailers. Of these, says Ken Graham of Power Direct, the only genuine start-up in the retail power market, the majority are small businesses, and many others are probably domestic customers moving house. Residential customers, he says, are not interested in changing, and the rate of switch is less than 40 per cent of what it was in New Zealand and the United Kingdom following the introduction of contestability.

Industry players are racing to create a new group of vertically and horizontally integrated structures (businesses owning generation or gas wells, and retailing in different state markets) in an effort to protect themselves from the wild gyrations of the energy markets and to gain economies of scale.");document.write("

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That need for protection became even more pressing on Thursday when the Australian Competition and Consumer Commission refused to take significant steps to rein in generator bidding practices in the national electricity market.

TXU chief executive Steve Philley says the move to vertical integration is not a return to the 1980s. "To say you've now got companies trying to remake the SECV is simplistic. You're seeing a re-aggregation take place along different lines. You see a re-aggregation of networks and a separate consolidation on the commodity-related businesses (retail and generation)." TXU is in all three sectors of the market - retail, generation and distribution.

Like Pulse, many of those who bought into Victoria's privatisation have fled or are trying to. In the next fortnight American Electric Power will unload its $1.4 billion CitiPower electricity business and another United States utility, NRG, has its suite of Australian generators on the market, including 25 per cent of the troubled Loy Yang A.

Sold for a whopping $4.8 billion at privatisation, two of Loy Yang A's three owners, CMS and Horizon, have written its value down to zero and by 50per cent in their books respectively.

In the past few years, GPU has sold out of gas and electricity transmission businesses, Scottish Power exited the Powercor electricity business, and Power Gen has sold its stake in Yallourn power station to China Light and Power. Both GPU and Power Gen walked away with losses.

Steve Philley says tight government regulation, like the electricity price caps placed on Victorian retailers last year, along with problems in the home market for some US utilities, are also encouraging the exits. "Australia has not worked out the way everyone had planned in terms of the original Victorian privatisation representations about light-handed regulation and no retail price caps," he says.

That price cap, say Philley and other retailers, is set too low and prevents retailers offering attractive deals to residential customers and has helped cripple contestability, as Ken Graham observed. To date, Power Direct has stayed out of the residential market altogether. It will soon extend its offers to households but in a very limited way, Graham says.

Pulse Energy was a classic creation of the new, private energy market. Its parent, United Energy, was formed as a joint venture between US energy group Aquila and AMP, then 42 per cent was onsold to Australian investors on the stock exchange. A few years on, United bought a gas company, then spun out the gas and electricity retailing businesses into Pulse with new partners Shell and Woodside.

United was seen as smart, fleet of foot and adept at the PR game, but as time went by some of the lustre was tarnished. It developed and floated a telco, Uecomm, which dived spectacularly, with the end of the Internet boom bringing losses to investors. Then its Pulse spin-off hit trouble in the volatile electricity markets, losing money to the tune of $19million after being caught with inadequate hedge positions. Pulse was valued at $950million when spun off in 2000 compared with the $880 million AGL paid for it.

AGL has learnt by hard experience the need to position itself at both ends of the energy supply business, having lost $280 million in the New Zealand market after its local subsidiary found itself underhedged in a hydro drought that pushed prices through the roof.

Armed with that experience, CEO Greg Martin has built small peak generators in Victoria and South Australia and is said to be joining a consortium to buy into the Adelaide generator Flinders Power, which is being sold as part of the NRG portfolio. He is also building a dominant position in the retail markets, holding 31 per cent of the total eastern Australian retail energy market and 37 per cent of the Victorian market.

AGL sees these stakes as a necessity. "Our view is there is not enough critical mass in the Australian energy market to sustain a large number of competitors," said an AGL spokesman. "Our strategy involves access to key state markets and access to wholesale energy. We want to be one of what we predict will be the three or four national energy players."

That sort of concentration is already becoming a reality. In South Australia, AGL and Origin have virtual monopolies in gas and electricity and AGL is still the leading gas player in NSW.

Victoria is becoming more concentrated, with AGL swallowing Pulse. With TXU and Origin bidding for CitiPower, Victoria could soon be down to three companies dominating both the gas and electricity markets.

Other moves towards national operators are unlikely as the ACCC would look unfavourably on further reductions in the number of competitors. With the energy business in the northern states firmly in government hands, there is no way for private operators to find a way in.

Queensland, and to a lesser extent NSW, are considered no-go areas by out-of-state competitors (except for industrial customers) as they are disadvantaged by government-run equalisation arrangements between generators and retailers designed to protect consumers from price spikes.

One of the drivers of vertical integration among retailers is volatility in the wholesale electricity market and this, say critics, is exacerbated by generator gaming. This week the ACCC chose not to implement most of a set of proposed measures that regulators hoped would tame uncompetitive bidding activity in the electricity market.